The Audio Home Recording
Act of 1992:
A Digital Dead Duck, or Finally Coming Home
to Roost?

Geoffrey Hull

Middle Tennessee State University

Introduction

The Audio Home Recording Act of 19921 (AHRA) was an attempt by Congress to enact a
legal and economic compromise between
the interests of audio hardware manufacturers,
blank recording media manufacturers, sound recording and musical
composition copyright owners, songwriters and recording artists, and
consumers.2 It ended nearly twenty years of dispute among those parties
about whether consumers who copied recordings at home for their own use
were infringing the copyrights of the sound recordings or the musical
compositions embodied in those recordings.3 The solution exempted private,
non-commercial copying in analog or digital format from copyright
infringement, placed a royalty on the sale of digital audio recording
devices and blank digital audio recording media, and required
manufacturers of digital recorders to incorporate a copy management
system into recorders to prevent serial copying.4

Despite the efforts of the manufacturers,
digital audio tape (DAT) recorders and MiniDisc digital recorders never
became popular with American consumers. Royalties collected by the
Copyright Office for the digital recorders and blank media were
therefore disappointingly low. In 1995 Billboard reported,
“[D]igital recording hardware has not caught on in the consumer
marketplace. DCC [digital compact cassette] has been pronounced dead by
industry executives, and the health of the rival MiniDisc is frail.”5 In 1998 the
record companies and artists sued Diamond Multimedia, Inc. to stop
production of the “Rio” and other Diamond products that could download
and store digital reproductions of recordings and songs in MP3 format.
A federal appeals court held that the devices were not “digital
recorders” within the meaning of the statute and that Diamond was not
required to pay royalties or include copy management software in them.
It appeared that the Audio Home Recording Act was a “bust.”

This article
argues that marketplace factors, which became very apparent in 2000,
are breathing new life into the Act and require that it be amended to
restore the balance of benefits among the AHRA beneficiaries. The focus
throughout is on the interplay between the marketplace and the law. The
article begins by examining the marketplace and legal factors that led
to the enactment of the Audio Home Recording Act. After a review of the
key provisions of the act, it then follows the marketplace and legal
factors from 1992 through the Diamond Multimedia case.
Finally, an examination of current marketplace and legal factors leads
to the conclusion that far from being a “dead duck,” the Audio Home
Recording Act of 1992 is alive and well. It may yet prove to be a
significant source of relief to consumers who will have readily
available digital recorders, to manufacturers who will be able to
market the digital recorders and blank media without concern over
litigation, and to authors and copyright owners who could see a
significant source of increased royalties from the home copying of
recordings. To maximize the benefits to all parties, the AHRA
“solution” should be improved by amending the act so there is a
mechanism for adjusting the royalty rates on digital recorders and
blank digital recording media.

Pre-1992
Background

Two
significant factors led to the enactment of the Audio Home Recording
Act. One of these was the shift in consumer audio technology from
analog recording on records and tapes to digital recording, primarily
on compact discs. That shift paralleled substantial growth in home
recording, especially the copying of prerecorded records, tapes, and
discs.

CD sales
soar

In 1973, the
year after sound recordings became separate copyrightable works,
pre-recorded cassette sales totaled only 15 million units, less than
four percent of total album sales that year. Table 1 indicates that
cassettes went from the least important format in 1973, to become the
dominant format in 1988, only to fall to a distant second place in
1999. During that same time period the vinyl LP went from sales
dominance to near extinction. Most importantly, the compact disc,
introduced in the United States in 1983, became the dominant format by
1993, and by the end of the twentieth century sales of CDs outnumbered
sales of cassettes by over seven to one. The clear preference of
consumers for digital formats, primarily compact discs, is now a factor
leading to the growth of home digital recorders and the “resurrection”
of the AHRA.

Table 1 -
Pre-Recorded Music Sales in the United States Manufacturer’s Shipments
by Configuration (millions of units shipped)

Home recording and copyright

The critical legal issue in the dispute over home copying of
recordings was whether home copying was a copyright infringement by the
copiers themselves, or by the manufacturers of the machines that made
the copying possible. The recording industry had long complained about
the impact of home recording/taping. A decade of both recording
industry and independent studies confirmed significant economic losses
due to home taping. A 1978 study found that twenty-one percent of the
population (32 percent of record buyers) taped at home. In the early
1980s a Warner Communication study estimated home taping “losses” at
$2.85 billion per year (if the home tapers had been purchasers of
pre-recorded music instead). Of that figure, $1.5 billion represented
the copying of recordings not already owned by the taper. 45 percent of
the respondents said they taped to avoid purchasing. The study noted
that a prime reason for the prevalence of home taping was that market
penetration of home recorders had jumped from 39 percent in 1977 to 48%
in 1980.6 Later studies in 1988 by the Office of Technology Assessment
(OTA) and the Roper Organization also found home taping prevalent. The
OTA study found that 37 percent of those over the age of 14 taped music
at home. The Roper study found that 34 percent of respondents said that
if they could not tape, they would not purchase the recordings in
question. The remaining 66 percent said they would have purchased the
recordings they taped. Based on that finding the Roper report estimated
annual lost sales at 322,500,000 recordings.7 At the prevailing $ 9.98 list price of tapes
in 1988,8 that would amount to
lost sales of about $ 3.2 billion
(assuming ten cuts per album). The International Federation of the
Phonographic Industry (IFPI—the international trade organization for
over 1400 record companies in 46 countries) urged a legislative fix to
the

home taping problem, but
predicted a “long and tortuous path.”9

Home
taping and the law, pre-1992

The legislative history of the Sound
Recording Amendment of 1971, which made sound recordings a class of
copyrightable works, indicated that home taping was considered a
permitted use. The House Report noted:

Specifically, it is not the
intention of the Committee to restrain the home recording, from
broadcasts or from tapes, or records, of recorded performances, where
the home recording is for private use and with no purpose of
reproducing or otherwise capitalizing commercially on it. This practice
is common and unrestrained today, and the record producers and
performers would be in no different position
from that of the owners of copyright in recorded

musical compositions over
the past 20 years.11

The 1976
Copyright Revision Act did not specifically address the question of
home taping. The only significant comment in the major legislative
history of that Act appears in the Senate Report. That comment was
addressed to the question of off-the-air home recording and was really
more of a demurrer than a comment: “The committee does not intend to
suggest, however, that off-the-air recording for convenience would
under any circumstances, be considered fair use.”12

Both sides
claimed victory in the wake of the 1984 Supreme Court “fair use”
decision in Sony Corp. v. Universal City Studios, Inc.13 The “right to tape” advocates
claimed that the Court’s decision that Sony’s Betamax video recorder
did not itself infringe copyright, legitimized home audio taping in the same manner as it had home video taping of
broadcast television programs. The copyright owners, on the other hand,
noted that the Court specifically expressed “no opinion” on the audio
recording question,14 and
they argued that time shifting broadcast video programs
was necessarily different from copying non-broadcast audio recordings.15 The exemption provisions of the
AHRA supposedly put that debate to rest.

Digital recording

By the time of the AHRA’s
enactment, the focus of the copyright owners had become digital
reproduction systems. Digital Audio Tape (DAT) recorders were finding
their way into the U.S. gray market by 1988 but had been kept out of
the main consumer market by threat of litigation from copyright owners.
Digital home recording meant that each copy could be a perfect replica
of the original without any degradation of sound quality. Each serial
copy (a copy of a copy of a copy …) would be just as “perfect” as the
source material from which the first copy was made. That, said the
copyright owners, made digital home recording much more of a problem
than analog home recording.16 In 1989 the manufacturers and copyright owners reached an
agreement to include a serial copy management system in the
players/recorders,17 and
the first legitimate consumer DAT machines finally hit
the

U.S. market in 1990.18
Even then, very few pre-recorded
DAT products were available. Most major labels only supplied some
classical titles and some independent labels such as GRP released some
jazz titles.20

Although the
sound recording copyright owners and manufacturers had agreed on some
copy management system, the threat and ultimate instigation of legal
action by musical composition copyright owners brought the digital
recorder part of the consumer electronics business to a standstill.
Negotiations between the parties over proposed legislation broke down
in 1990 and the copyright owners filed suit against Sony Corporation.20 All parties were faced with
losses. The Senate Report noted, “The lack of agreement among the
parties affected by this legislation was detrimental to all concerned.
The music industry received no royalties, the threat of legal action
precluded the electronics industry from introducing new products, and
the consumer was therefore deprived of the latest technology.”21 Tandy Corporation’s John Roach
testified, “[T]here is nothing more important to the vitality and
robustness of the consumer electronics industry than new
technology…since the introduction of the compact disc in the early
1980s, we have not had any exciting new technology on our shelves to
capture the imagination of the consumers.”22

Negotiations
resumed among the principals: the hardware manufacturers, record
companies, music publishers, songwriters, recording artists, and
performing rights organizations. By June of 1991 they reached what the
Senate Report called “a historic compromise.”23 That compromise was essentially
what became the Audio Home Recording Act of 1992. It was introduced in
Congress,24 hearings
were held, and about one year later the bill became law. In the
meantime the suit against Sony was dropped.25 The “long and tortuous path” had
finally come to its end.

By 1992 the consumer digital
recorder landscape had changed again. DAT had become a significant
player in the information technology market as a data storage medium
for personal computers. Sony dropped its plans for audio DAT in favor
of its new digital audio medium, the MiniDisc. Two of the other majors,
Polygram (then a subsidiary of the Dutch electronics firm, Phillips,
NV, which owned patents on the compact cassette) and EMI (then part of
the British electronics firm Thorn/EMI) placed their bets on a new
format they had been developing, digital compact cassette (DCC).26

Sony, the
original prime mover behind DAT, had to have mixed feelings over
consumer digital audio recorders and the rights of recording and
musical composition copyright own-ers—Sony was both. In 1988 Sony had
acquired CBS Records and ultimately CBS Songs music publishing
interests. Phillips was also an owner of hardware and software
interests. In 1990 the Japanese firm Matsushita acquired a half
interest in MCA Records and music publishing. So, by 1990, three of the
six recording industry “majors” (those firms with recording, music
publishing, and record distribution systems) had both digital recording
hardware and recording and musical composition software interests under
their corporate umbrellas.27

The AHRA
thus represented a perfect example of the “Chicago school” of law and
economics as represented by Richard Posner. Posner and the law and
economics scholars argue that laws can be understood and come to exist
as economic orderings of wealth.28
He notes that the best laws are those that
promote the maximization of wealth for all of the parties involved.29 In this case the rights of the
manufacturers to engage in commerce, of consumers to engage in copying,
and of authors and publishers to be rewarded for the uses of their
works provided economic rewards to all parties. Unfortunately, the
rewards to the copyright owners and authors were frozen in the
economics of the early 1990s whereas those of the other parties have
been allowed to grow through continued participation in the
marketplace.

The Audio Home Recording
Act

An understanding of the key
provisions of the Audio Home Recording Act of 1992 is necessary in
order to follow the Diamond Multimedia cases and to
grasp the economic impact of the Act in the “digital millennium.”
Because the enactment was built upon a series of economic compromises
developed by the interested parties rather than upon broad legislative
principles, it tends to be extremely detailed. The “devil” which
freezes the rewards of copyright owners in the economics of the early
1990s is, unfortunately, in the detail of the statute. The key
provisions focus on four areas: (1) a narrow definition of the kinds of
recording devices and blank media to which it applies, (2) the
establishment of a royalty system for digital recording devices and
blank media, (3) the exemption from copyright liability for home
recording in any format and for the manufacturers of the digital
recording devices and blank media, and (4) the requirement of a copy
management system in devices subject to its provisions.

Devices and media covered by the Act

Only those devices and media that work in
the digital domain are subject to the royalty and copy management
provisions of the AHRA. Furthermore, they are limited to those which
are “of a type commonly distributed to individuals for use by
individuals, whether or not included with or as part of some other
machine or device, the digital recording function which is designed or
marketed primarily for the purpose of, and that is capable of, making a
digital audio copied recording for private use….”30
Professional models, and those
that are used for dictation, answering machines or non-musical sounds,
are not covered.31 Only
recorders and media designed and used for digital
copying of a digital musical recording are defined as making “digital
audio copied recordings.”32

The blank
media provisions apply to media “in a form commonly distributed for use
by individuals that is primarily marketed or most commonly used by
consumers for the purpose of making digital audio copied recordings by
use of a digital audio recording device.”33
They do not apply to media
primarily intended for the purpose of recording audiovisual

works or non-dramatic
literary works (including computer programs and databases).34

The
royalty system

In order to establish some way to compensate
copyright owners for digital home copying of their recordings and
musical compositions, Congress created a compulsory licensing scheme.
It is “compulsory” because the copyright owners must permit some
digital (and unlimited analog) home copying of their works. It is a
license because permission to make the copies is given through the
manufacturers of the blank media and recording devices. Since it would
be impractical to attempt to directly license millions of individuals,
the license is a “blanket” license that lets all individuals make
copies of all musical recordings (and the recorded musical
compositions) within the limits of the Act. The Supreme Court
recognized the market efficiencies of blanket licenses in the music
industry in Broadcast Music, Inc. v. Columbia Broadcasting
System,
Inc.35 —in that
case the court referred to the blanket licenses for public performance
rights. The Court noted that the blanket license developed “out of the
practical situation in the marketplace: thousands of users, thousands
of copyright owners, and millions of compositions. Most users want
unplanned, rapid, and indemnified access to any and all of the
repertory of the compositions and the owners want a reliable method of
collecting for the use of their copyrights.”36 Since the fees collected from the
manufacturers and importers are disbursed to the rights owners and
authors, those fees for the license are royalties, i.e.,
payments to the owners of rights for permission to use those rights,37 and not taxes, i.e., “monetary
charges imposed by the government…to yield public revenue.”38 Those opposed to the system often
incorrectly referred to the payments as “taxes,” perhaps in an effort
to frame them in a negative light.39

Royalty
Structure: The statute creates a very specific distribution scheme for
the royalties, which are called Digital Audio Recording Technology
(DART) royalties by the Copyright Office. Manufacturers and
distributors of digital recorders distributed in the United States
(whether manufactured here or imported) pay two percent of the
“transfer price” (essentially the wholesale price) of the device. If
the device is integrated into a larger unit, the royalty is based on
the unit’s wholesale price unless separate royalties have already been
paid on other parts of the unit.40
The minimum royalty is $1 per unit.41 The maximum royalty is $8 for a
stand-alone unit or $12 per unit if it contains more than one digital
recording device.42 The
statute provides a way to increase the amount of the
maximum royalty through a proceeding with the Librarian of Congress,
but the maximum royalty cannot be decreased, and there is no provision
to increase the minimum royalty.43 To do either of the latter would require Congressional
action with an amendment to the statute.

Blank digital recording
media are subject to a royalty of three percent of the “transfer price”
for each item distributed in the United States (whether manufactured
here or imported). The royalty is only paid once, no matter how many
times the blank media change hands in the distribution chain. There is
no provision in the statute for increasing or decreasing this
percentage, nor for a maximum or minimum royalty on blank digital media.44

Royalty Distribution:
Royalties collected are divided, in accordance with the Act, into two
funds—a Sound Recording Fund and a Musical Works Fund. Two thirds of
the royalties are paid to the Sound Recordings Fund, one third to the
Musical Works Fund. The royalties in the Sound Recordings Fund are to
be further distributed by taking 2.625% off the top for distribution to
the American Federation of Musicians for instrumentalists not under
recording contracts who perform on sound recordings distributed in the
United States, and 1.375% to the American Federation of Television and
Radio Artists for vocalists not under recording contracts who perform
on sound recordings. Sixty percent of the remainder goes to the
copyright owners of the sound recordings (usually the record labels),
and forty percent goes to the featured recording artists.45 Table 2 below shows how the split
works out in terms of percentages of the entire royalty distributed.
The Musical Works Fund distribution system is not as complicated. The
statute simply splits that fund down the middle, with fifty percent
going to the writers and fifty percent going to the music publishers.46

Table
2 Percentage Shares of the Total AHRA (DART) Fund

Sound Recordings Fund

Musical
Works Fund

Labels
(Sound Recording

Music
publishers (musical works

copyright
owners)

38.4%

copyright
owners)

16.65%

Featured
artists

25.6%

Songwriters

16.65%

A.F. of M.

1.74%

A.F.T.R.A.

0.92%

Fund
Total

66.7%

Fund
Total

33.3%

Source: 17 U.S.C. §1006

Before any distribution of
funds, the “reasonable costs” for conducting the collection and
distribution of the royalties are deducted. During the first few years
of operations these expenses took approximately 25% of the rather
limited funds.48

The
Exemption

To tackle the issue of copyright
infringement by consumers and liability for contributory infringement
by manufacturers, and to “conclusively to resolve this debate,”
Congress fashioned a broad exemption as part of the AHRA:49

No action
may be brought under this title alleging infringement of copyright
based on the manufacture, importation, or distribution of a digital
audio recording device, a digital audio recording medium, an analog recording device, or an analog recording
medium, or based on the non-commercial use by a consumer of such a
device or medium for making digital musical recordings or analog musi

cal recordings.50

Note that
the language of the statute does not state that such actions are not
infringements, as do the other exemptions
of the Copyright Act,51 it
simply says “no action may be brought.” Neither the AHRA
nor the Copyright Act of 1976 directly defines “non-commercial.” The
Senate Report accompanying the AHRA suggests that the exemption is
limited to private, non-commercial uses. By way of
example, it notes that the exemption would apply to, “the making of an
audiogram by a consumer for use in his or her home, car, or portable
tape player, or for a family member…”52 A straight reading of the statute, though, might suggest
that a person could make a public non-commercial use, such as making a
copy for a friend or friends (or even for all takers) as long as there
was no “commercial advantage.” The Senate Report, but not the statute,
attempts to further define “non-commercial” by stating that this means
“not for direct or indirect commercial advantage.” Thus, the exemption
would not apply to “a person who makes multiple copies of a particular
audiogram and sells those copies to others….”53 To further complicate the issue,
the Senate Report notes that these definitions only apply in the
context of the AHRA exemption section.54
That limitation was to keep the definition from
affecting other infringement actions, classes of works, or principles
of copyright law. Whatever “non-commercial” means, the Senate Report
makes it clear that the exemption ceases to apply if the use becomes
commercial and at that point that the “normal” copyright actions and
defenses apply.56

Copy
management systems

The tradeoff for the analog and digital
exemptions for consumers and manufacturers was the imposition of the
royalty on digital recorders and devices discussed earlier, and the
inclusion of copying controls in all digital recorders manufactured in
or imported into the United States. These controls prevent the making
of “serial copies” of the same recording.

The premise of the Serial Copy Management
System (SCMS), or other such systems as may be used, is to prevent the
making of digital copies of digital copies. “One can make an unlimited
number of copies from the original, but one cannot copy the copy.”57 While the statute specifically
refers to the SCMS, it does not say exactly what it is to do. The Act
leaves the technical specifications to incorporation by reference and
simply requires that devices either use the SCMS or a system that has
the “same functional characteristics.” Without getting too involved in
the technicalities,58 the
SCMS does four things:

It controls copying done on
digital recorders and has noeffect on analog recorder operation;

It limits
second-generation copying of
copyrighted source material, not first-generation copying from the
original source;

It will allow only one copy
of a copy (two generations) made from an analog source to be recorded;

The code
which triggers the SCMS device is
not stored in the same location as the sound signals. Thus, unlike
“copycode” (a prior system that proved to degrade the audio signal),
the code does not affect overall sound quality.

The act also seeks to
protect the SCMS from circumvention. Section 1002(c) prohibits anyone
from importing, manufacturing, or distributing devices or offering
services, “the primary purpose of which is to avoid, bypass, remove,
deactivate or otherwise circumvent any program or circuit which
implements, in whole or in part, a system described in subsection (a).”60

Any action
for violation of the terms of the AHRA, including non-payment of
royalties or failure to include SCMS devices in recorders, is limited
to the remedies specifically provided by the AHRA and not to the usual
copyright infringement remedies. This is because the exemption
provision (Section 1008) prohibits infringement actions for devices and
recordings covered by the Act and the civil remedies section of the
AHRA (Section 1009) sets up specific remedies for AHRA violations. The
remedies of temporary or permanent injunction, damages, court costs
against any party, and reasonable attorney’s fees to the prevailing
party61,
generally mirror those for copyright infringement,62
but the damages section is
significantly different. Actual damages may be elected by the plaintiff
if the defendant has failed to provide copy management systems in
digital audio recording devices or has failed to pay royalties. In the
case of a failure to pay royalties, the court assesses the actual
amount due and may award an additional amount in its discretion up to
fifty percent of the actual damages.63
Statutory damages are limited to $2,500 per
device, $25 for incorrect encoding of digital musical recordings with
incorrect copyright status, category code, or generation status, and
$10,000 for a transmission that incorrectly communicates the copyright
status of the sound recording. The limits are substantially lower than
those otherwise available for copyright infringements of up to $30,000
per work for non-willful violations and up to $150,000 for willful
infringements.65 In the
case of repeated violations (willful or non-willful)
of AHRA provisions, a court may double the damage award, but no more.66 As is the case with copyright
infringement damages, the complaining party must choose which type of
damages it wishes to receive and may not receive both actual and
statutory damages.67

The
Harsh Realities of 1992-1999

Royalty Distribution. Most recording
artists, and many record labels, are represented in the distribution
process by the Alliance of Artists and Recording Companies (AARC), a
spin-off from the RIAA.68 The
AARC represents over 130 major and independent labels
and 900 recording artists. They receive the lion’s share of the
royalties from the Sound Recording Fund. The Act specifically states
that recording artists’ royalties are to be collected and distributed
directly to the AARC, not through the record companies. This is to
prevent the labels from cross-collateralizing the AHRA royalties and
using them to recoup recording cost or other advances under the
artists’ recording agreements.69 The Musical Works Fund is generally divided between ASCAP,
BMI, SESAC, the Harry Fox Agency (National Music Publishers
Association), and the Songwriters Guild. In 1994, the Sound Recording
Fund was distributed, but the Musical Works Fund was not. The parties
could not agree how to divide the fund and decided not to distribute
anything rather than have an expensive arbitration proceeding to divide
only a few hundred thousand dollars of royalties.70
They agreed to combine the 1995
through 1998 royalties and divide them in 1999, but they continued to
argue over the distribution amounts, and the Librarian of Congress
called a copyright arbitration royalty panel to resolve the dispute.71 The royalties were finally
distributed in 2001.72 Table
3 indicates that by 1998 and 1999 the royalties had
finally begun to amount to something worth dividing.

The Diamond
Multimedia Cases

The first, and only, case involving the AHRA
is Recording Industry Association of America v. Diamond
Multimedia
Systems, Inc. In that case the plaintiff trade organizations, the
RIAA, which represents most record companies in the U.S., and the
Alliance of Artists and Recording Companies, sought an injunction to
block the defendant from manufacturing or distributing its “Rio” MP3
music player. The RIAA complained that the Rio was being manufactured
and distributed in violation of the AHRA. They also sought royalties
that would be due for sale of the devices under the AHRA. The Rio is a
“lightweight, handheld device, capable of receiving, storing, and
re-playing digital audio file[s] stored on the hard drive of a personal
computer.”74 The
digital audio files it can store and play are in MP3 (MPEG 1 Layer 3)
compressed format. Such files (many unauthorized) are widely available
on the Internet.

The District Court denied
the request for a preliminary injunction, stating that the plaintiffs
could not show that they would suffer irreparable harm if an injunction
was denied, and that their probability of success on the merits was
“mixed.” The court noted that Section 1008 of the Act specifically
separated AHRA violations from traditional copyright violations.
Therefore, although irreparable harm may be presumed in traditional
copyright violations, it could not be presumed for AHRA violations. The
court reasoned that if the Rio were subject to the AHRA, the royalty
provisions of the AHRA would adequately compensate for any harm done.75 Although the District Court did
determine that the Rio was a “digital recording device” under the
definitions of the AHRA, it also concluded that under Section 1002(a)
there was no reason to require SCMS or any copy management system in a
Rio because “the Rio does not permit downstream copying because the Rio
itself has no digital output capability, and the removable flash memory
cards cannot be copied by another Rio device.” The court added,
“Therefore, it is nonsensical to suggest that the Rio must ‘sen[d] …
copyright and generation status information.’ In summary, incorporating
SCMS into the Rio appears an exercise in futility. Because a Rio with
SCMS would not violate Section 1002, and because a Rio without SCMS is
functionally equivalent to a Rio with SCMS, the Court is convinced that
the Secretary of Commerce will conclude that the Rio adequately
prohibits unauthorized serial copying for purposes of subsection
(a)(3).”76 Given
the lack of proof of irreparable harm to plaintiffs, the fact that
Diamond would suffer substantial harm from an injunction, the fact that
an injunction would “deprive the public of a device with significant
beneficial uses,” and the fact that the plaintiffs might not succeed on
the merits of the case, the preliminary injunction was denied.

In the RIAA’s appeal to the
Ninth Circuit Court of Appeals,78 the entire focus of the court was on whether the Rio was the
kind of device to which the AHRA applied. That inquiry turned on
whether the Rio was a “digital audio recording device” as defined in
the statute, Section 1001(3). To answer that question, the court had to
work through three layers of definitions. “A ‘digital audio recording
device’ is any machine or device of a type commonly distributed to
individuals for use by individuals, whether or not included with or as
part of some other machine or device, the digital recording function of
which is designed or marketed for the primary purpose of, and that is
capable of, making a digital audio copied recording for
private use ….” (emphasis as added by the court.) The statute goes on,
“A ‘digital audio copied recording’ is a reproduction in digital
recording format of a digital musical recording, whether that
reproduction is made directly from another digital musical recording or
indirectly from a transmission.” (emphasis as added by the court.)80 The final definition in the chain
then states, “A ‘digital musical recording’ is a material
object – (i) in which are fixed, in a digital recording format, only
sounds, and material, statements or instructions
incidental to those fixed sounds, if any, and (ii) from which the
sounds and material can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or device.”81 (emphasis as added by the court.)
At that point the court summarized the case as turning on whether the
Rio was able “to reproduce, either ‘directly’ or ‘from a transmission,’
a ‘digital musical recording.’”82

The Ninth
Circuit’s analysis concluded first that the Rio did not make its
reproductions from digital musical recordings, because the Rio copies
recordings from computer hard drives and computer hard drives are not
“digital musical recordings.” The statute specifically excludes
material objects “in which one or more computer programs are fixed ….”83 That is what computer hard drives
are, reasoned the court. It also found that conclusion to be supported
by the legislative history. Although the RIAA objected that such an
interpretation would eviscerate the statute by allowing a recording to
evade the statute by simply passing through a computer hard drive, the
court said, “While this may be true, the Act seems to have been
expressly designed to create this loophole.”84 A computer hard drive is not a
digital audio recording device, because its primary function is not to
make digital audio copied recordings. In addition, the court noted that
the “space shifting” of audio files that already resided on the owner’s
hard drive was in keeping with the statute’s purpose of protecting
consumers’ non-commercial copying of digital and analog recordings.85

Finally, the
court concluded that the Rio did not reproduce copies directly or
indirectly from transmissions. Although “transmission” is not defined
in the statute, the court took it to mean, “the use of the term in the
Act implies that a transmission is a communication to the public.”86 There was not much question that
the Rio could not directly copy from transmissions because it could
only copy files from a computer hard drive. Similarly, the court held
that because the Rio could not record from a transmission it was not
covered under the second part of the definition because the word
“indirectly” as used in the statute modified the verb “is made” rather
than “from a transmission.” The question, then, turned on the source of
the signal, either another digital musical recording (direct), or a
transmission (indirect). Since the source of the signals for a Rio had
to be a computer hard drive, neither method was used. The Rio,
therefore, was not covered by the AHRA.87

Commentary
on the case has been sparse. One writer concluded that the court
correctly decided the case on legal and policy grounds. In a Berkeley
Technology Law Journal article, Ines Gonzalez wrote, “The Rio does
not infringe any of the rights created under the federal Copyright Act
or the AHRA. Rather, it represents a classic instance of fair use, a
fundamental policy which should not be trumped by industry-spe-cific
goals.”88 That
statement reads more into the opinion than is actually there. The Diamond
Multimedia case is strictly a case of statutory interpretation of
the words in the Audio Home Recording Act. The court carefully
interpreted the words of the statute, saying, “We need not resort to
the legislative history because the statutory language is clear.”89 It examined the legislative
history only because “it is consistent with the statute’s plain meaning
and because the parties have briefed it so extensively.”90 The court never said the use of
the Rio was “fair use” and made no determination under provisions of
the Copyright Act other than the AHRA provisions. It did say that the
purpose of the Act was to support “private non-commercial use” for
consumers to make analog or digital recordings. The court analogized
the “space shifting” of files already on the computer’s hard drive not
by saying that such uses were fair use, but by saying, “Cf.
Sony Corp of America v. Universal City Studios [citations omitted]
(holding that ‘time shifting’ of copyrighted televisions shows with
VCRs constitutes fair use under the Copyright Act, and thus is not an
infringement).”91 Nowhere
did the Circuit Court or the District Court engage in a fair use
analysis of the Rio under Section 107 of the Copyright Act. It simply
said, “Such copying [space shifting] is paradigmatic non-commercial
personal use entirely consistent with the purposes of the Act [AHRA].”92 The Gonzalez article also
incorrectly cites the Senate Report. She says, “The Senate recognized
the importance of fair use of this technology and included a
declaration in its legislative report that a consumer who makes a
digital musical recording for use in her home, car or portable tape
player is insulated from copyright infringement.” The Senate Report
does not use the words “fair use” at all on the cited page.93 What the Senate Report actually
says is that, “the making of an audiogram by a consumer for use in his
or her home, car, or portable tape player, or for a family member, is
protected by the prohibition against copyright infringement actions
contained in this legislation [the AHRA]”94
(emphasis added).

A narrow reading of Diamond
Multimedia is supported by the later decision in A & M
Records, Inc. v. Napster. In that case Napster claimed that the
argument that space shifting was a fair use was supported by the Diamond
Multimedia and Sony cases. The court rejected the
argument, saying, “Defendant erroneously relies on the Ninth Circuit’s
assertion, in a case involving an inapplicable statute, that
space-shifting [in the case of downloading an MP3 file onto a computer
hard drive] constitutes non-commercial personal use.”96
Referring to the statement
incorrectly cited by Gonzalez from the legislative history, the Napster
court noted, “this dicta is of limited relevance…The Ninth Circuit did
not discuss the fair use doctrine in Diamond Multimedia.”97

Gonzalez
does correctly state that a plausible solution to Internet piracy (and
problems for copyright owners such as those posed by the Rio) is the
Secure Digital Music Initiative (SDMI). SDMI, which involves both the
labels and manufacturers, will encrypt sound recordings as a method of
protecting them from unauthorized duplication and distribution. In the
aftermath of the Ninth Circuit’s decision, Billboard magazine
reported, “Even though the RIAA has lost the appeal, industry insiders
say the trade group made its point last year by issuing the legal
challenge. Other manufacturers were readying MP3 players for the
marketplace at the time, and all but Diamond Multimedia held back.
Those manufacturers, like Diamond, have since joined the SDMI
initiatives.”99 The
same article quoted RioPort president Dave Watkins as saying, “we’re
putting 99.9% of our focus in those areas such as the RIAA’s Secure
Digital Music Initiative to make sure that we can have a platform that
the labels feel comfortable operating within, because that’s what this
is all about.”100 The
RIAA added, “Fortunately the shared interest in such a
marketplace has overtaken the lawsuit; the technology and music
industries have already come together in voluntary initiatives like the
Secure Digital Music Initiative.”101 Like the Cahn case filed against the
manufacturers of the DAT and MiniDisc recorders in 1990, the Diamond
Multimedia case may prove to have been a tactical political
exercise of limited long-term judicial importance.

The RIAA did gain a small anti-circumvention
victory prior to the Diamond Multimedia decisions. In
early
1997 the RIAA obtained a temporary injunction against Technolab Digital
Systems, Inc. for the marketing of its DigiCon2 device, a device
specifically advertised as circumventing the SCMS by allowing copying
from one DAT recorder to another.102 Later that year they settled with the defendant for
undisclosed terms.103

The
New Economic Reality

Even as late as 1998 some writers contended
that the compulsory licensing schemes and copying protection devices
such as mandated by the AHRA were not working. In an article critical
of the economics of such devices, Julie Cohen wrote, “Thus far,
consumers have refused to buy digital audio tape machines and media
outfitted with serial copy management that prevents second-generation
copying. However, both machines and recording media cost substantially
more than their analog counterparts, and high-fidelity sound recordings
are already available on compact disc.”104 The hindsight of 2001 is probably superior to the foresight
of 1998. However, it is also possible that Cohen was “reading the wrong
tea leaves.” Consumer loss of interest in audio cassette, preference
for Compact Disc, and industry lack of support for DAT and MiniDisc
formats had been brewing for quite some time.

The slow but steady
demise of the audio cassette

The growth of the
pre-recorded Compact Disc market made steady inroads into all aspects
of the cassette tape market, players/recorders and blank media. Sales
of all types of CD players grew steadily from 1994 through 1999. (Table
4)

In the five year period
1995-1999 market penetration of CD players increased 32% for home CD
players (hitting the 50% mark in 1997), 61% for CD boomboxes, and 45%
for personal portable CD players (Table 5). The data for 1999 total
more than 100 percent because some homes had more than one kind of CD
playback device. Consumer Electronics Association did not publish data
on market penetration of any kind of CD player into
homes.

The market for digital home
recording—which was substantial, as indicated by the sale of analog
cassette recorders and players—was left an unfilled void. Sales of
pre-recorded CDs and cassette tapes (Table 1), cassette recorders, and
blank tapes (Table 4) indicated that consumers preferred the CD format.
However, the technology for recording CDs at home did not exist. Into
the void for home recording entered the CD-R. Home CD recorders (or
“burners”) first entered the consumer market in 1999.105
By 2000 they appeared in mass
merchandisers such as Wal-Mart, Sears, and J.C. Penney, with prices
steadily dropping to below $500 for a dual well CD player/recorder. Consumer
Reports noted, “Finally, after years when the only way to make
your own recordings was to use cassette tapes or niche formats like the
minidisc [sic], there are now affordable ways to record your own
CDs.”106 By 1999
leading blank media manufacturers were offering multipacks of audio
CD-R blank discs (often referred to as CD-R-DA (Compact
Disc-Recordable-Digital Audio) or CD-RW-DA (Compact
Disc-ReWritable-Digital Audio)) in mass merchandiser outlets. Maxell’s
marketing director reported that sales of CD-R blank media were showing
strong growth, especially those intended for audio.107

Manufacturers’
suggested retail prices on MiniDisc recorders dropped as low as $200.108 Billboard reported
that MiniDisc (a digital recording system not popular in the United
States), “looks set to overtake analog tape as Japan’s home-recording
medium of choice.”109 Billboard
noted soaring production of MiniDisc players, recorders, and blank
media, declining production of cassette recorders and media, and
falling prices on MiniDisc recorders. Similar factors are at work in
the CD recorder market in the United States.

Royalty collections
improve

Because retail prices of
many CD-R units were below $500 by 2000, most stand-alone units were
paying about $6 in AHRA royalties at that time (assuming a wholesale
price of about 60% of the suggested retail price). Since the wholesale
prices of most consumer recorders had fallen well below $400 by 2000,
the maximum royalty of eight dollars per unit had become unimportant.
Reportedly, however, the RIAA began to push for higher royalty rates.110 In spite of the rather low
royalty rates and the falling prices of the digital recorders, AHRA
royalties jumped about 600 percent from 1993 to 1999, climbing past the
three million dollar mark for 1999 (Table 3).

Other marketplace factors
likely to introduce some confusion or discord into the system include
the declining prices in “professional” models and the introduction of
“semiprofessional” models into the market. Professional digital
recorders do not have to incorporate the SCMS technology due to the
AHRA’s “professional model products” exemption from the definition of a
“digital audio recording device.”111 The Act does not further define the term “professional,” nor
does the House Report. The Senate Report is more helpful. It notes that
the act covers devices that are “designed or marketed for the primary
purpose of … making a digital audio copied recording for private use.”
The Report notes that, “The focus of Chapter 10 is on machines or
devices ‘of a type commonly distributed to individuals for use by
individuals, where the primary purpose of the recording function is
recording audio works for private use.’”112 The examples used by the
committee appear to promote a rather narrow definition of
“professional.” They include machines such as those used by telephone
companies and the machines used by record manufacturers who make CDs
for sale to the public. Later, the Senate Report describes professional
products as those “designed, manufactured, marketed, and intended for
use by recording professionals in the ordinary course of lawful
business.” They discuss eight factors used by the electronics industry
to distinguish professional equipment including, “such criteria as the
nature of the advertising and distribution channels used to market the
device; the occupations of the ultimate purchasers of the device; and
the uses to which it is put.”113 The Report adds, “The committee does not intend that the
presence or absence of any single factor should create a presumption as
to whether or not a device is a professional model product.”114 Those who would like to avoid
paying the royalty on the machines and blank media might like the lower
priced “semiprofessional models” which typically do not include the
SCMS. As one writer put it, “When it comes right down to it, we’re all
professionals here, aren’t we?”115 Presumably the RIAA or another “interested copyright party”
could show that such semiprofessional models are not exempt. If they
were either sold primarily to consumers who used them to make
recordings for their private use, or were marketed as
such through traditional audio outlets with advertising targeted
towards non-professional consumers, then those machines, too, would
have to include the SCMS and pay the royalty—regardless of whether they
bore the legend “semiprofessional.”

Conclusion

In 1992 the AHRA represented a compromise.
It still benefits consumers by allowing them to make low cost digital
copies of digital recordings at home under a blanket compulsory
license. It still benefits audio hardware manufacturers by allowing
them to sell the recorders and blank media to consumers without threat
of litigation from copyright owners. The benefit to the copyright
owners, however, has declined in real dollars since its passage nearly
a decade ago. It is time to adjust the balance.

With the continued penetration of CD players
of all types into the home, portable, and auto markets, the continued
increases in sales of pre-recorded CDs, and the decline of audio
cassettes on all fronts, it appears that CDs have become the format of
choice for consumers. Lower prices and greater availability of CD
recorders for home use will encourage owners to make copies of new or
older CDs for use in their various CD players. All of this should bode
well for the royalties collected under the AHRA. These recording
devices, unlike the MP3 recorders, are clearly within the terminology
of the AHRA. The Act applies because they are “digital audio recording
devices” which are “distributed to individuals for use by individuals”
and are “designed or marketed for the primary

purpose of … making a digital audio copied
recording for private use.”116

The sound
recording and musical composition copyright owners had bet on technical
evolution from analog to digital recording. They predicted that the
conversion would take about a decade and that annual revenues from the
compulsory licensing of digital recorders and blank media would hit
about $100 million by 2002 (based on the sale of analog recorders and
blank tape in 1990).117 In 1992, when the AHRA was passed, sales of cassette
recorders amounted to 1,662,000 units with a retail value of over $266
million. Blank cassette sales totaled $621 million in retail value.118 Assuming the minimum one dollar
royalty on recorders and the three percent royalty on a “transfer
price” equal to approximately 50% of the retail price of the blank
media, that would amount to royalties of $266 million for the machines
and $15.5 million for the blank media if those sales had been all
digital media. By 2000 it became apparent that the evolution from
analog to digital copying was well under way, but royalty collections
are well behind industry projections due to the slower than expected
penetration of recorders and media into the market and to the rapid
drop in wholesale prices.

In order to make the
compromise enacted in 1992 reflect current marketplace realities, the
Act should be amended to allow for a more flexible system of royalties.
Such an improved system should be based more on the amount and value of
the copying being done than on the amount of copying and the value of
the recorders and blank media. One possibility is a subscription system
that would allow the purchaser of a digital recorder to copy a certain
amount of music for a set fee per month or per year. This would be
similar to the proposal for digital download systems being developed by
the major record labels. By late 2001 the majors were struggling to
launch their own subscription download services.

MusicNet was a joint venture
between Warner Music Group, BMG Entertainment, EMI Recorded Music, and
RealNetworks (AOL and Napster are also planned distribution outlets).
It planned to launch a subscription service in November 2001 where
customers could download up to fifty tracks per month for a fee of
$9.95 per month.119 Pressplay,
a cooperative effort by the other majors, Sony
Music Entertainment and Universal Music Group is using Yahoo!, MSN and
MP3.com for distribution. Much like the early days of the record clubs,
distribution through either is exclusive, with the exception of EMI.120 So, for example, BMG artists
such as Dave Matthews Band would not be available on Pressplay and Sony
artists such as Michael Jackson would not be available on MusicNet.121 By late 2001, the exclusive
distribution arrangements of the digital download systems were under
investigation by the Justice Department for possible anti-trust
violations122 —much
like the record clubs had been decades before.123
Another drawback of such a
subscription system would be that the consumer could not copy whatever
they wanted, whenever they wanted, as much as they wanted, without
subscribing, or without renewing their subscription fees.

A more practical method
would be to allow the royalty rates for recorders and blank media to be
adjusted. By including a royalty as part of the cost of the blank
media, every blank CD-R has its “permission” to copy built in. There is
no need to subscribe to anything. The more blank discs consumers use
the more copying they are doing, and the more royalties they are
paying. The one time royalty in the price of the recorder is only part
of the picture. Most of the other compulsory licenses in the Copyright
Act can be adjusted through a proceeding by a Copyright Arbitration
Royalty Panel and the Librarian of Congress.124 A similar provision for AHRA
royalties would avoid the situation that occurred with the compulsory
mechanical license. That rate was set in the statute at two cents per
phonorecord in 1909 and remained that way until 1978 when the 1976
Copyright Revision Act took effect. By then the value of two cents per
phonorecord had declined in real dollars to three tenths of one cent.125 The AHRA royalty collection
system is already in place. It is centralized through the manufacturers
of the recorders and blank media and the Copyright Office. It is a
blanket license that allows consumers to record any work, whenever they
want. The total royalties collected escalate with more home recording,
as they should. The problem is that the royalty rates were established
when recorders and blank media cost many times what they do today and
when market penetration of recorders was at a very low level. Even
without such an adjustment, the AHRA is certainly no “dead duck,” and
it may well come “home to roost” as predicted by the end of 2002, at
least for consumers and manufacturers.

archives), and 110 (exemptions for certain
performances and displays).

52Senate
Report, 51.

53Ibid.

54The Senate Report at 52, refers to this as
section 1002, it ended up being section 1008 in the final version.

55Ibid.

56Ibid.

57Senate
Report, 36.

58The
first thirty-seven pages of the Senate Report are the
technical specifications of the SCMS for those who do wish to get
technical. Those specifications were incorporated by reference into the
Act.

2000 the 9th Circuit Court of Appeals stayed
the preliminary injunction issued by the District Court. Oral arguments
were heard in October 2000, but at the time of this writing, no opinion
had been rendered. Eileen Fitzpatrick, Napster Files Final Appeal,
Billboard Daily Music News (Online), Sept. 14, 2000.

Biography

Geoffrey Hull is a professor in the
Recording Industry Department at Middle Tennessee State University. He
is the author of The Recording Industry, a book in Allyn
and
Bacon’s mass media series, published in 1998. Hull received his J.D.
degree from the University of Virginia Law School (1971), an

M.B.A. from Middle Tennessee State
University (1981), and a

B.S. in Industrial Management from Georgia
Tech (1968). He taught in Georgia State University’s Commercial
Music/Recording program for three years before coming to

M.T.S.U. as the first full-time faculty
member in theRecording Industry program in 1977. He served as chair of
the department from 1988-1990. He teaches primarily law courses
including copyright law, legal problems of the recording
industry, and media law, but has also taught a number of music business
courses including music publishing, marketing recordings, record store
operations, and concert promotion. In the Mass Communication graduate
program Hull teaches courses in Media Law and Ethics, and Media
Management. He was recognized as “Outstanding Teacher” by M.T.S.U. in
1981.

He is a licensed attorney
and a member of the Tennessee, Georgia, and American Bar Associations.
Hull is listed in Who’s Who in American Law. His
research interests are in copyright law, entertainment law, First
Amendment law, and recording industry economics. He has written
articles appearing in Mass Comm. Review, Popular Music and Society,
Feedback (the journal of the Broadcast Education Association), and
the NARAS Journal.